Hospital pricing data uncovers opportunity for consumers

David Dranove is Walter McNerney distinguished professor of health industry management and director of the Health Enterprise Management Program at Northwestern University's Kellogg School of Management.

Last week the Center for Medicare and Medicaid Services released, to considerable fanfare, a study of variation in hospital charges for a wide range of treatments. CMS reports that charges routinely vary by a factor of two or more. Many people believe that these data will promote consumerism, and like God, mother and country, who could oppose consumerism?

I am a big believer in health care consumerism, but the CMS data may do more harm than good. Everyone in the industry knows that hospital charges bear little relationship to hospital prices. Choosing a hospital based on charges is like buying a car based on its vehicle identification number. You may as well pick a name out of a hat.

To understand why the CMS data may not be all that helpful, consider how you would react to a report announcing that the amount that CPAs charge to do their client's income tax returns varies by a factor of two or more. You likely would conclude that some CPAs have clients with straightforward returns while others have clients with complex returns. The same problem afflicts comparisons of hospital prices.

Within treatment categories, there is wide variation in patient medical needs that differ systematically across hospitals. Northwestern Memorial Hospital may have a higher “price” to address back pain than most other hospitals in Chicago, but in all likelihood the hospital is treating more difficult cases. If we control for medical needs, Northwestern Memorial's price might be comparable to other hospitals'. If Northwestern Memorial offers higher quality, patients who shy away from its higher charges may be making a big mistake.

GETTING USEFUL DATA TO CONSUMERS

Perhaps the best that can be said about the CMS report is that it has people talking about hospital prices. In order for talk to turn into productive action, patients must be provided with data they can use, and they must be able to compare the actual prices paid to hospitals, not the fictitious charges. Better still, they should know their out-of-pocket payments. The good news is that more and more patients are demanding this data, and the private sector is rising to the challenge.

Facing ever-growing deductibles and coinsurance rates, patients are responsible for bigger shares of medical bills. Some patients have proactively asked their employers and insurers for pricing data. At the same time, some insurers have discovered that they can steer patients to lower-price providers by ranking them from one star for the lowest priced to three stars for the highest. (Pricing is confidential, so insurers keep things qualitative.)

The most exciting changes are happening at large self-insured employers. Consulting firms have arisen that will examine insurance contracts and compute prices and employee out-of-pocket payments for each hospital in an employer's network. For standardized services such as blood tests and MRIs, this is essential information required for employees to be good consumers. For more complex services, the next step is to report risk-adjusted prices. With hundreds if not thousands of dollars at stake, employees should demand this information.

Real pricing data allowing for meaningful comparisons. That is the basis for true consumerism.